Question

On February 1, 2021, Sanger Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sanger record on August 1, 2021, when the borrower pays Sanger the correct amount owed? A. Cash 2,000 Interest Revenue 100 Notes Receivable 2,100 B. Cash 2,100 Notes Receivable 2,100 C. Cash 2,100 Interest Revenue 100 Notes Receivable 2,000 D. Cash 2,200 Notes Receivable 2,200

Answer 1

Answer:

The closest answer is C. Cash 2,100 Interest Revenue 100 Notes Receivable 2,000.

Explanation:

The option C above is the closest because Sanger Corp. applies the accrual method of accounting, that was why a note receivable was established. The appropriate journals are:

Debit Cash                                        $2,100

Credit Note receivable                   $2,000

Credit Interest receivable                  $100

(Recognition of payment of note receivable with interest)

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest revenue on the notes is calculated as: Principal x Interest Rate x Time

In this case, the interest revenue is $2,000 x 10%/12 x 6 months = $100.

Note that Sanger Corp. would have been recognizing the interest revenue on a monthly basis and not recognize the whole interest revenue when it became payable. Monthly interest revenue recognition would be:

Debit Interest receivable                    $16.67

Credit Interest revenue                      $16.67

(Monthly interest revenue recognition on note)